<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1996 Commission File
Number 0-15495
MESA AIR GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Mexico 85-0302351
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2325 East 30th Street, Farmington, New Mexico 87401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (505) 327-0271
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
On August 14, 1996, the Registrant had outstanding 28,217,638 shares of Common
Stock.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1.
MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
1996 1995 1996 1995
-----------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues:
Passenger $ 127,946 $ 114,591 $ 363,111 $ 317,030
Freight and other 2,328 3,334 8,164 9,759
-----------------------------------------------------
Total operating revenues 130,274 117,925 371,275 326,789
-----------------------------------------------------
Operating expenses:
Flight operations 40,964 43,642 129,324 123,191
Maintenance 20,704 20,128 59,495 55,434
Aircraft and traffic servicing 18,410 15,827 55,283 46,311
Promotion and sales 19,851 19,730 56,000 53,688
General and administrative 7,039 6,582 21,665 19,321
Depreciation and amortization 5,978 4,877 16,356 13,659
Jet return provision 3,023 -- 3,023 --
-----------------------------------------------------
Total operating expenses 115,969 110,784 341,146 311,606
-----------------------------------------------------
Operating income 14,305 7,141 30,129 15,183
-----------------------------------------------------
Non-operating income (expenses):
Interest expense (3,602) (1,682) (6,743) (4,664)
Interest income 326 306 1,378 1,399
Other (419) 45 11,647 (1,580)
-----------------------------------------------------
Total non-operating income (expenses) (3,695) (1,331) 6,282 (4,844)
-----------------------------------------------------
Earnings before income taxes 10,610 5,810 36,411 10,339
Income tax expense 4,085 2,195 14,147 3,915
-----------------------------------------------------
Net earnings $ 6,525 $ 3,615 $ 22,264 $ 6,424
=====================================================
Average common and common equivalent
shares outstanding 28,970 33,313 31,122 33,279
=====================================================
Net earnings per common and
common equivalent share $ 0.23 $ 0.11 $ 0.72 $ 0.19
=====================================================
</TABLE>
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<PAGE> 3
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30 September 30
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 39,196 $ 53,675
Marketable securities 12,301 40,901
Receivables, principally traffic 43,494 44,811
Expendable parts and supplies, net 28,760 24,682
Prepaid expenses and other current assets 5,540 6,923
--------- ---------
Total current assets 129,291 170,992
Property and equipment, net 435,785 170,899
Lease and equipment deposits 7,601 26,147
Intangibles, net 56,830 60,598
Other assets 31,589 18,086
--------- ---------
Total assets $ 661,096 $ 446,722
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital leases $ 16,886 $ 8,283
Accounts payable 14,840 23,205
Income taxes payable 3,054 1,073
Air traffic liability 5,234 5,131
Other accrued expenses 25,045 17,922
--------- ---------
Total current liabilities 65,059 55,614
Long-term debt and capital leases, excluding current portion 316,851 78,411
Deferred credits and accrued liabilities 31,625 28,353
Deferred income taxes 23,845 28,461
Stockholder's equity:
Preferred stock of no par value, 2,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock of no par value, 75,000,000 shares authorized;
28,217,638 in 1996 and 33,460,742 in 1995 shares issued
and outstanding 100,255 151,957
Unrealized gain on marketable securities, net 10,320 13,050
Retained earnings 113,141 90,876
--------- ---------
Total stockholders' equity 223,716 255,883
--------- ---------
Total liabilities and stockholders' equity $ 661,096 $ 446,722
========= =========
</TABLE>
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<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended June 30
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 22,264 $ 6,424
Adjustments to reconcile net earnings to
net cash flows from operation activities:
Depreciation and amortization 16,356 13,659
Reserve for contingent liabilities 10,000 --
(Gain) Loss on sale of securities (22,008) 145
(Gain) Loss on disposal of property and equipment 631 (29)
Amortization of deferred credits (1,903) (684)
Stock bonus plan 720 385
Changes in assets and liabilities:
Receivables (783) (660)
Expendable parts and supplies (4,078) (5,802)
Prepaid expenses and other current assets 1,383 (1,111)
Accounts payable (5,565) 1,831
Other accrued liabilities (393) 301
--------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES: 16,624 14,459
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (20,446) (88,154)
Proceeds from sale of property and equipment 7,565 99,634
Proceeds from sale of marketable securities 38,861 23,334
Intangibles -- (33,327)
Other assets (2,689) 732
Lease and equipment deposits 2,819 (8,942)
Collection of notes receivable -- 306
--------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES 26,110 (6,417)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and
obligations under capital leases (5,767) (8,872)
Proceeds from issuance of common stock 1,510 192
Common stock repurchased (53,931) --
Proceeds from deferred credits 975 1,173
--------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES (57,213) (7,507)
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (14,479) 535
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 53,675 35,567
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 39,196 $ 36,102
========= =========
</TABLE>
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<PAGE> 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended June 30
<TABLE>
<CAPTION>
Supplemental disclosures of cash flow information:
Cash paid during the period for: 1996 1995
-------- -------
<S> <C> <C>
Interest $ 3,094 $ 4,470
Income taxes 5,701 3,192
</TABLE>
Mesa purchased fixed assets during the periods ended June 30 upon which debt was
assumed or incurred as follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Assets purchased $279,656 $88,154
Debt assumed or incurred 262,000 --
Equipment deposits $ 13,377
-------- -------
Net cash $ 4,279 $88,154
======== =======
</TABLE>
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<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine-month period ended June 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending
September 30, 1996.
2. The consolidated financial statements include the accounts of Mesa Air
Group, Inc. and its wholly owned subsidiaries WestAir Holding, Inc., Air
Midwest, Inc., San Juan Pilot Training, Inc., Four Corners Aviation, Inc.,
MAGI Insurance, Ltd., and Mesa Leasing, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related disclosures contained in
Mesa's Annual Report on Form 10-K for the year ended September 30, 1995,
filed with the Securities and Exchange Commission.
3. Income tax expense is based upon Mesa's expected annual effective tax rate
of 38.6 percent.
4. Certain 1995 balances have been reclassified to conform to the 1996
presentation. For the three- and nine-month periods ended June 30, 1995,
$770,000 and $2.0 million, respectively, related to USAir connection
credits were reclassified from promotion and sales to aircraft and traffic
servicing for consistent presentation with current year. In addition, $4.7
million of marketable securities were reclassified to other assets during
1996 because the Company determined that such securities would not be
offered for sale.
5. Legal Proceedings
See Part II. Item 1
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<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
Mesa Air Group, Inc. ("Mesa") and its subsidiaries provide service to the
general public as America West Express, Mesa Airlines, United Express and USAir
Express operating in various regions across the United States. Mesa's airline
subsidiaries are Air Midwest, Inc. and WestAir Holding, Inc. (operating through
its wholly-owned subsidiary WestAir Commuter Airlines, Inc.).
The following table sets forth selected operating data of the Company for the
periods indicated below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
-------------------------------- -----------------------------------
1996 1995 1996 1995
-------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Passengers 1,646,792 1,585,775 4,806,925 4,413,426
Available seat miles (ASMs) (000) 598,170 577,838 1,840,996 1,666,156
Revenue passenger miles (000) 341,041 300,698 1,022,765 830,176
Load factor 57.0% 52.0% 55.6% 49.8%
Yield per revenue passenger mile 37.5 (cents) 38.1 (cents) 35.5 (cents) 38.1 (cents)
Average fare $77.69 $72.26 $75.54 $71.83
Operating cost per available seat mile 19.4 (cents) 19.2 (cents) 18.5 (cents) 18.7 (cents)
Operating cost per available seat mile,
excluding jet return provision 18.9 (cents) 19.2 (cents) 18.4 (cents) 18.7 (cents)
Revenue per available seat mile 21.8 (cents) 20.4 (cents) 20.2 (cents) 19.6 (cents)
Average stage length 167 162 167 162
Number of aircraft in fleet 173 179 173 179
Cities served 166 172 166 172
Number of employees 3,800 3,400 3,800 3,400
</TABLE>
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<PAGE> 8
Three Months Ended June 30, 1996 Versus Three Months Ended June 30, 1995
<TABLE>
<CAPTION>
Three Months Ended June 30
------------------------------------------------------------------------
1996 1995
----------------------------------- ------------------------------------
Percent of Percent of
Cost total operating Cost total operating
per ASM revenues per ASM revenues
-------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Flight operations 6.8(cents) 31.4% 7.6(cents) 37.0%
Maintenance 3.5(cents) 15.9% 3.5(cents) 17.1%
Aircraft and traffic servicing 3.1(cents) 14.1% 2.7(cents) 13.4%
Promotion and sales 3.3(cents) 15.2% 3.4(cents) 16.7%
General and administrative 1.2(cents) 5.4% 1.1(cents) 5.6%
Depreciation and amortization 1.0(cents) 4.6% 0.9(cent) 4.1%
Jet return provision 0.5(cent) 2.3% -- --
Total operating expenses 19.4(cents) 89.0% 19.2(cents) 93.9%
Interest expense 0.6(cent) 2.8% 0.3(cent) 1.4%
</TABLE>
Mesa generated an 11.7 percent growth in passenger revenues from $114.6 million
during the three-month period ended June 30, 1995 to $127.9 million during the
three-month period ended June 30, 1996. This increase is attributable to a 3.8
percent increase in passengers carried in addition to a 7.5 percent increase in
the average ticket price from $72.27 for the quarter ended June 30, 1995 to
$77.69 for the quarter ended June 30, 1996. These increases resulted in a 6.9
percent increase in revenue per available seat mile (RASM). In addition to
competitive conditions affecting the industry, ticket prices were also affected
by Mesa's share of the fares set by its code-sharing partners and improved
efficiencies created by the Company's new automated revenue management system.
Operating costs, excluding the jet return provision of 0.5(cents) per ASM,
decreased from 19.2(cents) to 18.9(cents) per ASM. The primary reason for the
decrease in operating expenses was a decrease in flight operations expense
resulting from significant expenses incurred in the prior year to integrate
Fokker 70 and de Havilland Dash 8-300 aircraft into the Company's fleet which
are not present in the current year, retirement of six of the Company's seven
Dash 8-300 aircraft early in the third fiscal quarter, and the conversion of 69
1900D aircraft from operating leases to owned aircraft. The purchase of these 69
aircraft reduced lease expense which is classified as flight operations expense.
The 0.4(cents)-per-ASM increase in aircraft and traffic servicing is partially
attributable to the discontinuation of USAir connection credits in addition to
an increase of the USAir per-passenger fee. Another component of the increase in
aircraft and traffic servicing costs is the increased costs of operation at
Denver International Airport (DIA) as compared to Denver's Stapleton Airport.
The Company is working to reduce those costs under its control in Denver by
eliminating Dash 8-300 aircraft and making scheduling changes to help offset the
DIA cost increases. Depreciation and amortization increased by 0.1(cents) per
ASM due to the increased depreciation on the 69 newly acquired 1900D aircraft
previously financed under operating leases. Interest expense per ASM increased
0.3(cents) primarily as a result of the purchase of the 69 Beech 1900D aircraft.
Mesa accepted delivery of two Fokker 70 jet aircraft during the summer of 1995.
Mesa's purchase contract included an option to acquire six additional aircraft.
The agreement with Fokker allowed Mesa the right to return the two aircraft to
Fokker from 12 to 18 months after delivery, subject to a six-month notification.
Management believed that operation of a fleet of eight Fokker 70 aircraft would
have met management's operational expectations.
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<PAGE> 9
During January 1996, Fokker announced a suspension of payments to its creditors.
By April 1996, Fokker had entered into liquidation and was unable to provide the
six additional Fokker 70 aircraft to Mesa. Therefore, since management believes
a fleet of two Fokker 70s cannot be operated profitably long-term, the Company
has noticed the return of the two Fokker 70 aircraft and begun the process
of locating other suitable jet equipment of one fleet type.
Daimler-Benz, the owner of the aircraft, and Mesa have negotiated an agreement
in principle which allows Mesa to continue operating the two aircraft through
July and October 1997 at existing lease rates in exchange for the Company's
agreement to pay for costs related to use of the aircraft through the date of
return. Therefore, at June 30, 1996, the Company accrued a provision for the
hours utilized on the aircraft through June 30, 1996. In addition, the Company
will accrue additional time-related aircraft costs on an hourly basis through
the remainder of the lease term of the aircraft. In addition to time-related
costs for prior aircraft usage, the Company has accrued a provision for certain
estimated costs related to the return of these two aircraft which are still in
dispute with the manufacturer.
Operating profits increased from $7.1 million in the three-month period ended
June 30, 1995 to $14.3 million, excluding the jet return provision of $3.0
million, in the three-month period ended June 30, 1996. This increase is due to
the increase in revenue per ASM and the decrease in cost per ASM, as discussed
above.
Nine Months Ended June 30, 1996 Versus Nine Months Ended June 30, 1995
<TABLE>
<CAPTION>
Nine Months Ended June 30
------------------------------------------------------------------------
1996 1995
----------------------------------- ------------------------------------
Percent of Percent of
Cost total operating Cost total operating
per ASM revenues per ASM revenues
-------------- ------------------ --------------- -------------------
<S> <C> <C> <C> <C>
Flight operations 7.0(cents) 34.8% 7.4(cents) 37.7%
Maintenance 3.2(cents) 16.0% 3.3(cents) 16.9%
Aircraft and traffic servicing 3.0(cents) 14.9% 2.8(cents) 14.2%
Promotion and sales 3.0(cents) 15.1% 3.2(cents) 16.4%
General and administrative 1.2(cents) 5.8% 1.2(cents) 5.9%
Depreciation and amortization 0.9(cent) 4.4% 0.8(cent) 4.2%
Jet return provision 0.2(cent) 0.8% -- --
Total operating expenses 18.5(cents) 91.8% 18.7(cents) 95.3%
Interest expense 0.4(cent) 1.8% 0.3(cent) 1.4%
</TABLE>
Mesa generated a 14.6% growth in passenger revenues from $317.0 million during
the nine-month period ended June 30, 1995 to $363.1 million during the
nine-month period ended June 30, 1996.
Passengers carried during the nine-month period ended June 30, 1996 increased
approximately 8.9% over the nine-month period ended June 30, 1995 and the
average ticket price increased 5.2% from $71.83 to $75.54. These increases
resulted in a 3.1 percent increase in revenue per available seat mile (RASM). In
addition to competitive conditions affecting the industry, ticket prices were
also affected by the Company's share of the fares set by its code-sharing
partners and improved efficiencies created by the Company's new automated
revenue management system.
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<PAGE> 10
Operating expenses incurred for the nine-month period ended June 30, 1996 were
approximately 18.3(cents) per ASM, before the jet return provision of 0.2(cent)
per ASM, compared to 18.7(cents) per ASM for the nine-month period ended June
30, 1995. A decrease in flight operation expenses from 7.4(cents) per ASM to
7.0(cents) per ASM is a significant component of the decrease in operating
expense unit costs. The decrease is primarily a result of significant expenses
incurred in the prior year to integrate Fokker 70 and de Havilland Dash 8-300
aircraft into the Company's fleet which are not present in the current year,
retirement of six of the Company's seven Dash 8-300 aircraft early in the third
fiscal quarter, and the conversion of 69 1900D aircraft from operating leases to
owned aircraft thereby reducing lease expense, which is classified as flight
operations expense. This decrease is partially offset by an increase in aircraft
and traffic servicing attributable to the discontinuation of USAir connection
credits in addition to an increase of the USAir per-passenger fee. Another
component of the increase in aircraft and traffic servicing costs is the
increased costs of operation at Denver International Airport (DIA) as compared
to Denver's Stapleton Airport. The Company is working to reduce those costs
under its control in Denver by eliminating Dash 8-300 aircraft and making
scheduling changes to help offset the DIA cost increases.
Operating income increased from approximately $15.2 million in the nine-month
period ended June 30, 1995 to approximately $30.1 million for the same period in
1996. This increase is due to the increase in revenue per ASM and the decrease
in cost per ASM, as discussed above.
Consolidated net earnings for the nine-month period ended June 30, 1996
increased to $22.3 million from $6.4 million during the nine-month period ended
June 30, 1995 as a result of the factors discussed above plus other income of
$11.4 million, which includes a $22 million gain on sale of America West stock
and a special reserve of $10 million established in respect of the prospective
resolution of certain disputed state and federal regulatory tax matters and for
the cost of defending shareholder lawsuits discussed in Part II., Item 1., Legal
Proceedings. The $10 million reserves consist of $5.7 million for costs of
aggressive defense in pending shareholder lawsuits, $1.8 million reserve related
to assessed claims by the IRS and $2.5 million reserve for possible tax claims
from various states. In the event these matters are settled in the Company's
favor, unnecessary amounts will be returned to income.
LIQUIDITY AND CAPITAL RESOURCES
Mesa's cash and marketable securities at June 30, 1996 were $51.5 million as
compared to $94.6 million at September 30, 1995. This decrease is the result of
approximately $53.7 million utilized to repurchase approximately 5.5 million
shares of the Company's stock during the nine-month period ended June 30, 1996.
This use of cash was offset by cash generated from operating activities of $16.6
million. The remainder of the decrease is primarily related to normal capital
expenditures, tax payments and principal payments on indebtedness.
Mesa had receivables of $43.5 million at June 30, 1996 which consist primarily
of amounts due from code- sharing partners United and USAir. Under the terms of
the United and USAir agreements, Mesa receives a substantial portion of its
revenues monthly through the Airline Clearing House. Mesa has consistently
generated cash flow in excess of its operating needs.
Mesa currently has a $20 million line of credit, of which approximately $16
million is available. The utilized portion of this line of credit has been used
to facilitate the issuance of letters of credit issued primarily to airport
authorities to guarantee payment of landing and passenger usage fees.
As of June 30, 1996, the Company had aggregate indebtedness of $333.7 million
payable to various parties under promissory notes issued in connection with the
purchase of aircraft. The notes have interest rates ranging from 6.6 percent to
8.75 percent, maturities ranging from 1996 to 2011 and require monthly
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<PAGE> 11
installments aggregating approximately $2.0 million. During May 1996, Mesa
converted 69 1900D aircraft operating leases to aircraft purchases. Raytheon
Aircraft Credit Corporation provided credit for the $279.7 million purchase.
Raytheon also agreed to provide debt financing to Mesa for all remaining 1900D
aircraft to be delivered under the existing aircraft order (18 at June 30,
1996).
The Company has lease obligations on existing aircraft operated by the Company,
which are classified as operating leases and therefore not reflected as
liabilities on the Company's balance sheet. After conversion of 69 operating
leases to purchases, at June 30, 1996, 76 aircraft remain on operating leases to
the Company with terms ranging up to 16 1/2 years. Aircraft lease expense for
the quarter ended June 30, 1996 was $15.6 million. Future lease payments due
under all aircraft operating leases were approximately $209.8 million at June
30, 1996.
As of June 30, 1996, the Company had 18 Beechcraft 1900D aircraft on order. The
Beech (Raytheon) Aircraft Purchase Agreement allows Mesa to trade in an existing
Beechcraft 1900C aircraft in an "as-is" airworthy condition for each 1900D
aircraft purchased. By December 1996, Mesa expects to take delivery of the 18
new 1900D aircraft on order and will return all 1900C (12) aircraft.
WestAir amended its purchase contract with Embraer Aircraft Corporation in
November 1995. Under terms of the amended agreement, both WestAir and Embraer
agreed to use their best efforts to negotiate a used aircraft purchase agreement
for the 13 remaining deliveries or to cancel all remaining obligations under the
contract with no liability to either party. In April 1996, both parties agreed
to cancel the contract with no liability to either party and begin an evaluation
of a potential exchange of the Company's entire fleet of 36 EMB-120 aircraft for
new equipment. As of June 30, 1996, no EMB-120 aircraft fleet trade-in program
had been negotiated.
Mesa has an aircraft order with Bombardier, Inc. to acquire 25 de Havilland
Dash-8-200 aircraft. Deliveries of the new Dash 8-200 aircraft were to have
begun in the spring of 1996 at the rate of approximately two aircraft per month.
However, production delays have postponed the delivery schedule, resulting in
the delivery of only three Dash 8-200 aircraft by June 30, 1996. From January
through June 1996, Mesa returned six Dash-8-300 and two EMB-120 aircraft to
Bombardier as part of the Dash-8-200 trade-in program. Mesa will trade in the
one remaining Dash-8-300 and two additional Embraer Brasilia aircraft on a
one-for-one basis as the new Dash-8-200 aircraft are delivered. Commitments for
financing for the new Dash 8-200 aircraft are in place. Mesa also has an option
to acquire 25 additional de Havilland Dash-8-200 aircraft.
Delays in the delivery of new Dash 8-200 aircraft to Mesa have caused a
significant shortage of capacity in Mesa's Denver system. Mesa and de Havilland
are presently developing a new Dash 8-200 delivery schedule based on the
resolution of de Havilland's production delays.
Recent events in Mesa's Denver system have resulted in many consumer complaints
regarding the quality of service in that system. A United States Senator and
two Congressmen from Colorado have also complained publicly about the level of
service in the Denver system and are seeking a Congressional investigation
regarding the service level there.
Several significant events have led to the service problems encountered in the
Denver system, and the Company is taking steps necessary to correct these
problems as soon as possible. The primary event which led to this situation is a
significant shortage of capacity caused by the manufacturer's delay in delivery
to Mesa of new Dash 8-200 aircraft. An additional factor was a recent
airworthiness directive issued by the FAA requiring Mesa to disable the
windshield anti-ice system. This caused numerous flight cancellations. The
airworthiness directive issued by the FAA also provides for replacement of the
affected windshields to restore their anti-ice capability. At present, Mesa has
replaced approximately 90% of the affected windshields resulting in a major
reduction in cancellations caused by compliance with the FAA's airworthiness
directive. The recent pilot hiring surge by major airlines led to the hiring of
many of Mesa's pilots, some of which left with as little as three days' notice.
This situation caused the cancellation of many flights.
Mesa has hired additional customer service personnel to improve customer
service levels and has hired additional pilots to resolve crew shortages. In
addition, the Denver system was rescheduled to provide three reserve aircraft
to reduce flight cancellations. Mesa believes the above steps will return the
level of customer service in the Denver system to an appropriate level.
By August 1996, Community Express Airlines, Limited (CEAL), in which Mesa is a
substantial shareholder, had not yet attained break-even cash flow from
operations. CEAL management is currently raising additional capital which they
believe will be sufficient to allow CEAL to attain positive cash flow
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<PAGE> 12
from operations. The Company has elected not to invest further resources in
CEAL. As of June 30, 1996, the book value of the Company's investment in CEAL
approximates $360,000.
The Company's shareholders ratified a reincorporation proposal at the April 1996
shareholders' meeting. Reincorporation in the state of Nevada will be effected
prior to September 30, 1996. Management believes the reincorporation will enable
the Company to realize significant savings in state taxes. The Company will also
benefit from certain corporate code provisions not available in the state of New
Mexico.
During December 1995, the Federal Aviation Administration (FAA) announced rules
which require commuter airlines with aircraft of 10 or more passenger seats
operating under FAR Part 135 rules to begin operating those aircraft under FAR
Part 121 regulations by the end of March 1997. Mesa is one of the largest
regional airlines operating under FAR Part 135 regulations. In anticipation of
Mesa's conversion to FAR Part 121 and to address issues raised in past
inspections, the FAA began a special review of Mesa's operations in June 1996.
Based on the new rules, the current results of the FAA review and discussions
with the FAA, Mesa anticipates a one-time capital expenditure of approximately
$1.0 million in fiscal 1997 to bring all aircraft currently being operated by
Mesa into compliance with the enacted FAR Part 121 rules. In addition, Mesa
presently anticipates ongoing operational costs in order to comply with the FAR
Part 121 rules of approximately $2.5 million per year.
During the third quarter ending June 30, 1996, the Mountain West Airlines pilots
narrowly rejected the proposed Air Line Pilots Association (ALPA) contract,
which had been negotiated between the Company and the pilots' negotiating
committee; therefore, negotiations between the Company and the pilots will
continue. Negotiations between the Company's WestAir subsidiary and its pilots,
represented by ALPA, also continue.
Congress has passed a bill which would reinstate the 10 percent tax on airfare.
The President is expected to sign the bill into law prior to the end of August.
The tax is scheduled for reinstatement seven days after the President signs the
bill and will expire December 31, 1996. Congress is working on an extension of
the tax beyond December 31, 1996 and expects to pass a bill providing for an
imposition of a similar tax this fall. While there can be no assurance that the
imposition of this tax will not decrease revenue, management believes its
automated revenue management system will help minimize any negative impact on
revenue per available seat mile as a result of the reimposition of this tax.
Statements made throughout this "Liquidity and Capital Resources" section
related to the timing of aircraft deliveries and reincorporation of the
Company, anticipated tax savings, costs of compliance with FAA regulations and
other rules, acts of Congress, and the passing of taxes imposed on Mesa to the
consumer are forward-looking statements. These forward-looking statements
involve risks and uncertainties not in control of the management of the
Company, including, but not limited to production delays caused by aircraft
manufacturers, a failure by state corporation commissions to accept
reincorporation documents, bureaucratic delays on amendments to existing
legislation, requests made by the FAA which may result in increased costs of
compliance, consumers unwilling to incur greater costs for airline service and
aggressive interpretation by various state taxing authorities of their state
tax statutes.
-12-
<PAGE> 13
The following table lists the aircraft operated by Mesa as of June 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF AIRCRAFT
---------------------------------------------
Passenger
Type of Aircraft Owned Leased Total Capacity
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beechcraft 1900 95 17 112 19
Embraer Brasilia 2 32 34 30
BAe Jetstream 31 21 21 19
Dash 8-200 3 3 37
Dash 8-300 1 1 50
Fokker 70 2 2 78
---------------------------------------------
Total 97 76 173
---------------------------------------------
</TABLE>
-13-
<PAGE> 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
During 1994, seven shareholder class action complaints were
filed in the United States District Court for the District of
New Mexico against Mesa, certain of its present and former
corporate officers and directors, and certain underwriters who
participated in Mesa's June 1993 public offering of common
stock. These complaints have been consolidated by court order,
and after the court granted in part a motion to dismiss in May
1996, a second amended consolidated complaint was filed
alleging that during various periods the defendants caused or
permitted Mesa to issue publicly misleading financial
statements and other misleading statements in annual and
quarterly reports to shareholders, press releases and
interviews with securities analysts. The current complaint
alleges that these statements misrepresented Mesa's financial
performance and condition, its business, the status of its
operations, its earnings, its capacity to achieve profitable
growth and its future business prospects, all with the purpose
and effect of artificially inflating the market price of
common stock of Mesa throughout the relevant period. The
complaint further alleges that certain officers and directors
of the Company illegally profited from sales of Mesa common
stock during these periods. The complaint seeks damages
against the defendants in an amount to be determined at trial
(including rescission and/or money damages as appropriate),
disgorgement of all insider trading profits earned by
defendants in connection with the sale of common stock of
Mesa, and reasonable attorney, accountant and expert fees.
During October 1995, the court granted class certification in
the action.
In a related case, in September 1994, a shareholder derivative
suit was filed in the United States District Court for the
District of New Mexico, purportedly on behalf of Mesa. The
complaint charges certain present and former officers and
directors with violation of fiduciary duties in causing or
permitting the exposure of Mesa to the class action litigation
described above and in selling Mesa stock based on inside
information. The complaint seeks recovery for damages
allegedly suffered by virtue of the alleged conduct, including
any settlement or judgment in the class action, annulment of
any indemnification agreements between the Company and its
officers and directors, disgorgement to Mesa of any profits
received on stock sales, and attorneys' fees. The derivative
lawsuit was dismissed by the Court on August 12, 1996.
Mesa and the corporate officers and directors deny the
allegations made against them in these lawsuits. Further, Mesa
and the corporate officers and directors believe they have
substantial and meritorious defenses against those allegations
and intend to continue to defend their position vigorously.
However, should an unfavorable resolution of this litigation
occur, it is possible that Mesa's future results of operations
or cash flows could be materially affected in a particular
period.
Mesa is also a party to legal proceedings and claims which
arise during the ordinary course of business, none of which
are expected to have a material adverse effect on Mesa's
financial position.
-14-
<PAGE> 15
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MESA AIR GROUP, INC.
Registrant
/s/ W. Stephen Jackson
--------------------------------------------
Date: 8/14/96 W. Stephen Jackson
Chief Financial Officer, Treasurer and
Vice President of Finance
(Principal Accounting Officer)
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000810332
<NAME> MESA AIR GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 39,196
<SECURITIES> 12,301
<RECEIVABLES> 43,720
<ALLOWANCES> 226
<INVENTORY> 28,760
<CURRENT-ASSETS> 129,291
<PP&E> 373,944
<DEPRECIATION> 61,841
<TOTAL-ASSETS> 661,096
<CURRENT-LIABILITIES> 65,059
<BONDS> 0
0
0
<COMMON> 100,255
<OTHER-SE> 123,461
<TOTAL-LIABILITY-AND-EQUITY> 661,096
<SALES> 371,275
<TOTAL-REVENUES> 371,275
<CGS> 341,146
<TOTAL-COSTS> 341,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,743
<INCOME-PRETAX> 36,411
<INCOME-TAX> 14,147
<INCOME-CONTINUING> 31,122
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,122
<EPS-PRIMARY> .72
<EPS-DILUTED> 0
</TABLE>
